Virgin America Gains 45% in Its First Month But Questions Linger

NEW YORK (TheStreet) -- Virgin America (VA) obviously got the timing right for its initial public offering. But analysts are divided on whether the carrier got the business model right.

Sunday will be the one-month anniversary of the carrier's IPO. Priced at $23 a share, Virgin America opened on Nov. 14 at $27 and closed at $30. On Thursday, it closed down 69 cents at $33.56. From its IPO price, it has gained 45%.

Only now are analysts beginning to begin following Virgin. While the firms that participated in the IPO must wait 40 days from the IPO date to issue reports, two early reports differ markedly in their outlook for the carrier.

CRT Capital analyst Mike Derchin initiated coverage Thursday with a buy rating and a $42 price target. But two days earlier, Wolfe Research analyst Hunter Keay initiated coverage with a rating of "peer perform with a negative bias."

The consensus estimate by Thomson Reuters is for Virgin America earnings to grow from $2.06 in 2015 to $4.17 in 2016, but so far only two analysts have provided estimates. Derchin, who apparently was not included in the tabulation, estimates earnings at $1.80 a share in 2014 and $3.02 in 2015.

"Virgin America's fundamentals have been improving in recent years since it de-leveraged its balance sheet, slowed its rapid capacity growth, and solidified its core route network," Derchin wrote. He said the carrier is distinguished by "a differentiated, quality product, loyal frequent fliers, profitable growth plans, and expanding EBITDAR margins."

Significantly, Keay noted that "Virgin America is coming to the market at a time when many believe the outlook for U.S. airlines, particularly domestic-oriented ones, has never been better." A rising tide is lifting all boats in the airline industry.

But Keay forecast that Virgin America's 2015 pretax margin will be 14.6%, which is 110 basis points below the industry average. The carrier is too heavily concentrated in its top 10 routes, which account for 56% of capacity, while competitors' top 10 routes account for just 13% of capacity, on average.

Moreover, Virgin's market share on its top 10 routes averages just 18%, while competitors' market share on their top 10 routes averages 70%. That limits Virgin's pricing power.

Comparing Virgin to JetBlue (JBLU) , Keay noted that both traded strongly immediately after their IPOs. Following its 2002 IPO, however, JetBlue spent the next decade "doing little," he said, noting, "We believe the shine will wear off Virgin America, as it did for JetBlue, and the focus will shift from soft areas (brand) to hard areas (math)."